Setbacks For The Banking Industry (BAC, C, JPM, WFC)

The banking industry experienced another setback as a report revealed a staggeringly high number of banks at risk of failure in the last quarter of 2010. The number of banks at risk accounted for almost 12% of all federally-insured banks and is the highest number in almost two decades, according to the report. It is imperative to note that less than 2% of all federally-insured banks are responsible for most of the earnings in the industry. While most of the large banking institutions such as Bank of America BAC and Citigroup C are sitting pretty with their government bailouts and prospering throughout the economic recovery, smaller institutions have not been so fortunate. Over 150 local and regional banks failed last year compared with 25 in 2008 and only three in 2007, according to the report. While the roles have reversed and larger institutions have regained their footing as the smaller one crumbles, lone Federal Reserve Bank of Kansas City President Thomas Hoenig believes disbanding the large institutions would prevent a future crisis of this magnitude. Hoenig said, “They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk.” Even despite the Dodd-Frank Act established to reduce the risk that large financial institutions pose to the aggregate economy, Hoenig speculates that it will not be enough to divert the potential for future large scale bank failures. Although Hoenig stands alone in the Federal Reserve meetings, his ideas present several trading ideas. Investors may consider taking short positions in the large banking institutions like Citigroup C, Bank of America BAC, JP Morgan JPM or Wells Fargo WFC. If the Volcker rule from the Dodd-Frank Act serves to hinder the growth and activities of these institutions or if Hoenig is right and disbandment will occur eventually, it could be a profitable bet to make. Disclosures: long C Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.